China is challenging the dollar as the world’s reserve currency as the United States seeks to reduce its trade deficit and decouple its economy from China, Breitbart Economics Editor John Carney said in an interview Tuesday with Fox Business host Larry Kudlow.
Carney doesn’t see the Chinese yuan replacing the U.S. dollar as the world’s reserve currency, but he does believe the latest moves by China and other nations to trade in other currencies will result in “a fracturing of the world currency system and the world trade system.”
“I think China does not want to continue to use the dollar,” Carney said. However, that does not mean that China will be able to convince other nation’s to adopt the yuan as a replacement, he noted.
“The UK is never going to start doing most of its trade in yuan. That’s not going to happen. Most of the world will not trust China to become the reserve currency,” he said. “However, Russia? Sure. We’ve cut off Russia from the dollar. And Iran will do it too. North Korea, sure. North Korea will do it.”
China’s challenge to the dollar is part of its larger Belt and Road plan, Carney explained. “This is part of what they want to do with Belt and Road: get everybody to start using their currency rather than ours. I don’t think this is something that’s going to happen overnight. But, I will say, I think ten years from now, the dollar will be less dominant than it is right now.”
“According to the Bank for International Settlements, 90 percent of the transactions in the world economy are based on the dollar,” Kudlow countered.
The Fox Business host also highlighted China’s unsuitability to control the world’s reserve currency. “China, for example, is a country with capital controls [and] very little investment coming in and out because that’s the way the Communist Party wants it,” he said. “I know because we tried to open them up to financial activities and intermediation. They won’t do it.”
Kudlow argued that rather than worrying about the yuan replacing the dollar, Americans should be more concerned about U.S. government’s reckless spending and regulatory policies.
“Before we worry about the yuan, we should worry about six more years of heavy-duty spending and taxing and regulating that will create disincentives for people to hold dollars. That I think is the bigger problem. People just don’t want to hold dollars because we’ve made such a hash of the economic underpinnings. That’s my biggest worry,” Kudlow said.
Carney agreed with his concern, noting especially the negative impact of inflation on the dollar’s attractiveness as a reserve currency.
“We had a very good record on inflation. Basically, we had very low inflation for close to 40 years, and we blew that up,” he said, pinning the blame on President Joe Biden’s “massive spending plans” following the COVID pandemic.
“Right now, everybody who held dollars just found out that their account is worth ten percent less than it was before we got into this inflation mess,” Carney said. “So, we really do need to get inflation under control because that will start to alienate people.”
“But I do think that as we try to work for a lower trade deficit with China that will leave China with fewer dollars,” he explained. “Almost mechanically, we are moving in a way that will have China be less dependent frankly on selling stuff to the U.S., and the U.S. far less dependent on buying stuff from China. That will begin fracturing the currency around the globe.”
Carney added that countries like Saudi Arabia will watch to see “which way this is going to break, and they’ll try to play both sides.”
“Well, perhaps, perhaps, perhaps. We’re still running close to a $400 billion trade deficit with China despite protestations to the contrary,” Kudlow countered. “There may be some more yuan, but on the other side of that transaction is going to be the U.S. dollar.”
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